Not such sweet success

Its best-known product is poured on thousands of bowls of cornflakes every day. But sugar prices are down, the shares have slumped, and the City finds Tate & Lyle boring. Now chief executive Larry Pillard, the man with a 'background in starch', is plotting a carbohydrate comeback

The vast Tate & Lyle sugar refinery in Silvertown, in London's East End, offers a stark reminder of how Britain's manufacturing base has shrunk. This huge site, within a stone's throw of London's City airport, was built in 1878 by Henry Tate before the merger with Abram Lyle's rival syrup business was a pipe dream.

A century later, at the peak of the trade, there were many such plants in Britain. Silvertown employed 3,000 people with an astonishing 47 staff "tea rooms". Now it is the only sugar cane refinery in Britain with 850 workers and one canteen.

Most of the operations are mechanised, with vast vats of brown liquid sugar bubbling alone where it once took teams of engineers to tend them. Even the line where two packs of sugar are bagged every second is a sad, quiet place. The shoes of the handful of workers there scrunch on the spilled sugar.

This is the modern face of Tate & Lyle, a business trying to escape its low-value commodity past and seek a more profitable future in a broader range of sweeteners and other food ingredients.

Tate & Lyle is synonymous with sugar. Its best-known white granulated product is poured on thousands of bowls of cornflakes and stirred into thousands of cups of tea every day. Lyle's golden syrup, still sold in its trademark green and gold tins, helps bakes cakes and add flavour to winter plates of porridge.

The business was run by the Tate and Lyle families up until 1978 when John Oliver Lyle handed over to Lord Jellicoe. After Sir Saxton Tate's retirement two years go, there are no family members left on the board. But despite the strength of its brands and a history going back nearly 150 years, Tate & Lyle remains something of a low-profile, secretive enigma.

In the City, its reputation is that of an uninspired company, dull even. The business hardly helps itself. Its motto is "Adding value to carbohydrates", which doesn't exactly set the pulse racing. Larry Pillard, Tate & Lyle's American chief executive, is described as having "a background in starch". This hardly makes you want to meet him.

Tate & Lyle wants to be a top brand company and top manufacturer of "added value" food ingredients such as the syrup that is used to make soft drinks. But it is still dreadfully reliant on commodity issues, such as the supply of sugar cane. It wants to extend its brand tosweets and ice cream but the message somehow gets lost in the fog of manufacturing-based issues.

The bottom line from which it cannot escape is that Tate & Lyle is a business in trouble. A grim profits warning last month forced the shares down to a 12-year low. Profits this year are expected to reach £200m, barely more than the business made in 1989. The main problem is a sugar glut in the United States which has pushed the sugar price into freefall and Tate & Lyle's US sugar business into loss.

A strategic review by the summer is likely to lead to a major shake-up, including possible sale of the American business. Worse, this historic company is considered a takeover target, with Cargill, a huge US commodities trader seen as a possible predator.

"There isn't a huge queue of buyers for these kind of assets," says David Laing, food analyst with Investec Henderson Crosthwaite. "The mistake they made was not getting out of US sugar before it all turned sour."

The seriousness is not lost on Mr Pillard. As chief executive, this 52-year-old engineer knows he has to restructure and refocus the company if it is to remain independent. He says: "Harvard did research on companies that have survived for more than 100 years. They found one of the keys to their survival was the ability to reinvent themselves. That is one of the key attributes of Tate & Lyle."

Tate & Lyle is among the last original constituents of the old FT30 still in existence (the others are ICI, Blue Circle and GKN). This is proof, says Mr Pillard, of the company's ability to adapt to changing circumstances. But can it survive this time? "I hope so. We have good products and good companies within the business. The share price is a concern but everyone in our industry is having share price woes."

He denies a breakup would be helpful. "I work for the shareholders and I am charged with producing value. But I certainly don't think that's the best approach. The businesses we can fix we'll work on fixing. Those we can't we will re-evaluate."

There is little doubt a radical approach is needed. Two years ago Tate & Lyle's share price stood at close to 580p. Now it languishes at little more than 200p, valuing the whole business at just £1bn. Analysts say the combined value of the constituent parts of the business is probably worth more than the whole, suggesting some sort of breakup will come.

There is certainly a lot to break up. Tate & Lyle operates in 50 countries and employs 22,000 people. In the UK its Tate & Lyle sugar business is a major force, with 40 per cent of the UK sugar market (the rival Silver Spoon brand owned by Associated British Foods has the other 60 per cent). In US sugars, the company operates under the Domino, Western, and Redpath names. It also owns plants from Mauritius to Zimbabwe where the cane is processed into raw sugar at the point of harvesting (because the sugar content deteriorates rapidly after it is cut). The problem is that though demand for Tate & Lyle's sugar is relatively stable, it has no control over supply. In Europe, sugar is protected by the quota system but no such mechanism exists in the US. There, recent bumper crops of sugar beet and cane have undermined the sugar price. A fresh glut of cheap sugar is emerging from Mexico, worsening the problem. Also, most of Tate & Lyle's US competitors are privately owned or are co-operative farm groups which can take a more relaxed approach to profitability.

Not only is there too much sugar, there are too many producers. Mr Pillard admits: "Our industry has not consolidated as rapidly as our customer groups (like the major global supermarkets)."

This is not all Mr Pillard's fault. His predecessor, Sir Neil Shaw, quadrupled the size of Tate & Lyle's American sugar business when he bought Amstar, the Domino sugar company in 1988. Mr Pillard could have sold when profits peaked in the mid-1990s but he chose to hang on and has probably regretted it ever since.

One food industry analyst says the company now has three choices. "They can participate in the consolidation in the industry and thereby reduce refining capacity; they can get the government to alter the sugar regime, which will be difficult; or they can get out of US sugar."

The problems do not end there. The company's US Staley starch division has had a chequered past including a long-running strike in the mid-1990s. Costs have come down since, the number of workers has halved and production has increased. But profits at the division peaked in 1995 and prices of the operation's key syrup has fallen, with raw material prices rising. In Australia, over-capacity forced its Bundaberg raw sugar subsidiary into loss.

To be fair to Mr Pillard, he has not been sitting on his hands. Costs have been cut and acquisitions have been made in the higher-value food ingredient sector. This is part of Mr Pillard's aim to increase the proportion of profits derived from higher value sectors from 35 per cent to 50 per cent within three years.

A key move in this direction came in 1998 when Tate & Lyle paid $210m for Haarmann & Reimer, an American business which makes citric acid for a food ingredient. The business could make $20m profit this year, the face of flat pricing. "It shows we know how to integrate these businesses and take out costs," Mr Pillard says. A disposal plan has started. Last month the company's Staley's division sold its stake in the Argentinian IMASA business for £51m. On Monday it raised $58m more by selling a US grain business.

There are other opportunities. First, the company is finally looking to exploit the huge strength of its brands. Mark White, sales and marketing director of Tate & Lyle Europe, says: "Tate & Lyle is a trusted, 'friendly' brand and our research shows that particularly the Lyle's golden syrup brand might extend to other products."

The company is already launching an organic sugars range and signed a deal with McVitie's to produce a cake and cake bar with the Lyle's syrup branding. There are also talks to an ice cream manufacturer about a Tate & Lyle-branded ice cream and about Lyle's golden syrup sweets.

The company is finally modernising the packaging for its sugar bags. A new tube- shaped plastic container will be launched in May with a top that will shake sugar if pushed one way and pour it if turned the other. And the company's 50-year-old sugar symbol, Mr Cube, is being phased out. He was drawn up to fight off the threat of nationalisation.

Another growth opportunity is to use carbohydrates to make biodegradable plastics. Mr Pillard says the high price of oil means an alternative made from a renewable source is more attractive. "Carbohydrates are great molecules," Mr Pillard says. "They are very flexible." E-commerce could be helpful. The company is considering joining the Grocery Manufacturers of America's "e-hub" where members can pool resources to buy products more cheaply. This will be a major step for Tate & Lyle where businesses have remained autonomous within the group, squandering opportunities for economies of scale.

Will all this be enough to enable Tate & Lyle to survive? David Laing at Investec says the company has a "fair chance", if only because there are so few possible buyers. Other analysts say sugar is such a complicated business - the second most political commodity in the world after oil - that it would deter anyone but an expert.

But a break-up bid is possible. Financial buyers such as Kohlberg Kravis Roberts and Hicks, Muse, Tate & Furst could launch a bid and sell off the unwanted bits. For an empire built on the sweetest of products, that would be a sour, sad end indeed.